1. Make a budget
Creating a budget can make it easy to see where each dollar is going, enabling you to identify areas where you can reduce spending and save money. Write down your monthly after-tax income, list your monthly fixed and variable expenses (such as groceries, utilities, entertainment, insurance payments, minimum debt payments, personal care), and sort these expenses into three categories—essentials, nonessentials, and savings/debt repayments. When it comes to your loans, make minimal payments on all of them, but concentrate on paying off the ones with the highest interest rates or the ones with variable rates first. If you’re unemployed, you may be eligible to defer your loans for a period. It’s always better to ask the loan company about your options than to make assumptions or to default.
2. Pay your existing bills on time
Paying your bills on time and in full can help you avoid late fees and high interest rates. If you’re not able to pay the total balance, try to pay more than the minimum payment to lower the amount going to interest and fees. Making consistent payments—full, more than the minimum, or the minimum—is a very important factor in maintaining a good credit score. It is especially crucial if you’re planning to purchase a home, finance a car, or apply for a small-business loan in the future.
3. Create an emergency fund
After organizing your loan repayments, try to put aside a small amount every month for emergencies. If an unexpected financial shock arises, an emergency fund can help you avoid relying on credit cards or loans, which could turn into long-term debt.
4. Enroll in a 401(k) plan
If your company offers a 401(k) savings plan, enroll. Most employers match a percentage of your contribution. It’s a win-win situation. If you are paying off debt, you may have to start with a lower contribution in order to manage paying off what you owe, but try to contribute enough to get the maximum match. As you begin to lower your credit card and loan balances, you can increase your contributions to your 401(k).
5. Start investing early
Student loan and credit card debt can cause you to hold off on investing, but if you can find the budget flexibility to get started, it may pay off in the long run. Investing helps you establish good savings habits. And the sooner you start, the more compounding interest works to your advantage.
6. Purchase life insurance
If you pass away, your loved ones may be responsible for paying off your debts. You can protect them by purchasing life insurance, which is considerably less expensive for younger buyers. And depending on the type of policy you purchase, you may be able to access your policy’s cash value to help with future expenses, such as buying a house or starting a business.1
7. Pay with cash
If you have a large amount of credit card debt, switching to cash can help you reduce and avoid further debt. Paying the minimum balance and avoiding additional charges could help you reduce your balance more quickly.
8. Limit the number of credit cards you own
It’s generally recommended that you limit yourself to two to three credit card accounts at a time. While having multiple credit cards can sometimes benefit your credit score, you run the risk of spending more in credit than you’re able to repay in cash.
Avoiding debt frequently asked questions
1Accessing cash value reduces the death benefit and available cash surrender value.
2 Gabrielle Olya, “The Average Millennial Now Has More Than $100K in Debt: 3 Tips for Paying It Off,” Yahoo.com, December 7, 2022.
